Short and Higgins began their note to clients with six
reasons that Whole Foods' stock, which has slid over 40% from its
2015 high in February, could continue to underperform.

When it came time in their assessment for positives, however,
they came up with three things: an outsider could come in and
make significant business changes, a leveraged buyout
could happen, and it can't get any worse.

Whole Foods' growth has been
slowing for some time now, traffic growth in their
stores has been dropping off since its peak at the start of 2012.
Furthermore, the prices and margins of their food are the highest
in the sector, which the analysts say is driving away traffic.

Deutsche
Bank

"WFM’s merchandise margins (ex-LIFO, ex-rent) are well above its
publicly traded specialty food retail peers," said the note.
"Some of the difference can be explained by mix, but, in general,
we believe WFM may need to reduce merchandise margins to the
~34.5% range – or ~400 bp lower than their current margins in
order to fix its pricing problem."

Worse than any of the financial problems, say the analysts,
is the lack of managerial course corrections.

"Today, the market for natural/organic food has increased
dramatically, attracting many more competitors – including some
truly large disruptors including both Kroger and Costco,"
wrote Short and Higgins.

"In our view, Whole Foods has not had much experience
operating in this type of environment where many more
(sophisticated) grocers sell products that are similar to Whole
Food’s, making differentiation more difficult to achieve and
putting much greater emphasis on sharper pricing – not Whole
Food’s core strength."

The analysts also mentioned that the company has no clear plan
"B" and that their new initiatives undertaken in July of
last year have done nothing to help mitigate the damage.

This mismanagement has Short and Higgins calling for new blood
like that of an activist investor.

A leveraged buyout is less likely at the current share
price, said the note, but it is possible.

To the company's credit, said the analysts, it does still
have strong brand recognition and they laid out a number of steps
that the company could shed some of its bad ideas and get
back on track, but they see it as unlikely without a new face
stepping in.